Great Expectations and the End of the Depression

Abstract

This paper suggests that the US recovery from the Great Depression was driven
by a shift in expectations. This shift was caused by President Franklin Delano
Roosevelt's policy actions. On the monetary policy side, Roosevelt abolished
the gold standard and -- even more importantly -- announced the explicit objective
of inflating the price level to pre-Depression levels. On the fiscal policy
side, Roosevelt expanded real and deficit spending, which made his policy
objective credible. These actions violated prevailing policy dogmas and initiated
a policy regime change as in Sargent (1983) and Temin and Wigmore
(1990). The economic consequences of Roosevelt are evaluated in a dynamic
stochastic general equilibrium model with nominal frictions. (JEL D84, E52,
E62, N12, N42)